Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel

Author/Editor:

Salvatore Dell'Erba ; Sergio Sola

Publication Date:

July 3, 2013

Electronic Access:

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Summary:

This paper reconsiders the effects of fiscal policy on long-term interest rates employing a Factor Augmented Panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989-2012. We find that two global factors—the global monetary and fiscal policy stances—explain more than 60 percent of the variance in the long-term interest rates. Compared to the estimates from models which do not account for global factors, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

Series:

Working Paper No. 2013/159

Subject:

Central bank policy rate Financial services Fiscal policy Long term interest rates Public debt Short term interest rates

English

Publication Date:

July 3, 2013

ISBN/ISSN:

9781484394502/1018-5941

Stock No:

WPIEA2013159

Pages:

44

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